JP Morgan Horizontal Range Imminent

JPMorgan (JPM:NYSE) is a global diversified bank holding company engaged in retail, commercial, and investment banking giant. With a market capitalization just shy of $245 billion, it ranks among the biggest financial institutions on the globe.  Its status of “too big to fail” has been modestly contained by increasingly draconian regulatory measures enacted over the previous few years, but that has not hurt the company in its efforts to maximize shareholder value as evidenced by the near 27% one-year return.  Relative to peers, JPMorgan has been consistent outperformer trading just shy of record highs of $66.18 reached on May 14th. Despite the momentum of share prices, the company has been plagued by multiple scandals which have led to increased oversight and regulation, hindering growth and forcing the company to keep cash on the side for any unforeseeable losses.  Based on the confluence of fundamental and technical factors, share prices look poised for a pullback to momentum and keen to trade sideways until circumstances change.

The Fundamental Look

JPMorgan has been one of the strongest performing American bank holding companies of 2015.  In spite of challenges early in the 2015 trading environment, share prices have continued to outpace gains in peers, outperforming even the biggest American bank, Wells Fargo.  Although the bank has been beaten black and blue by regulators in recent years for the multitude of scandals that have been surfacing, the leadership, under the stewardship of Jamie Dimon, continue to grow both the top and bottom lines. The interesting part is that all the businesses underlying the bank are contributing to growth, not just one area which is commendable. JPMorgan has derived substantial revenue growth and earnings from divisions across the bank whether related to capital markets or banking operations.

Adding to JPMorgan’s momentum are strong earnings results that come at a time when the company is seeking to exploit efficiencies and cut costs to support higher growth and improved margins. Earnings reported on April 14th saw the company report revenues of $23.107 billion versus $22.365 billion a year earlier while earning $1.45 per share, beating the consensus estimate of $1.39.  Legal costs did dent earnings however, coming in at nearly $500 million and will likely remain a drag even if certain costs are abating. Nevertheless, earnings are bolstered by the shareholder value offered, with JPMorgan’s dividend growing fairly steadily. The gross dividend yield of 2.43% is great for investors looking for a place to park cash instead of leaving it on the sidelines in a savings account making minimal interest.  On the whole, the banks fundamentals look very strong and the company is considered fairly value despite a P/E ratio that is slightly below peers at 10.69.  While this might mean some further upside in shares, the recent rally in share prices might be at its end.

Shares have seen tremendous momentum over the last few months, but can the rally last?  It is far more likely that shares move within a holding pattern over the near-term until the next earnings release. There are some strong tailwinds for the bank, namely reduced legal costs. However, JPMorgan will be recording some losses in the near future relating to the foreign exchange rigging probe although in the grand scheme of things, this is a mere temporary setback for the bank despite the fact that prosecutors will extract a guilty plea from the institutions involved.  After the revelation that UBS, Swiss investment bank turned whistleblower, will now have no immunity, banks are vigorously lobbying for a way around these implications. This does not take into consideration the increased regulatory scrutiny facing the bank, especially as it is required to hold more regulatory capital relative to peers which cannot be allocated to growing the business. 

The Technical Take

From a technical perspective, momentum higher in prices looks to be ripe for a pullback even though the prevailing uptrend is intact after share prices hit new highs. The bank has largely benefited from expansion in the Federal Reserve’s balance sheet, making tremendous profits on the implicit subsidy provided by a low interest rate environment. However, with the advent of higher rates around the corner, this could depress earnings expectations going forward. The bullish case is evident based on both the shorter and longer moving averages trending higher and the recent cross to the upside of the 200-day moving average by the 50-day moving average is regarded as a strongly bullish sign for stocks, known as the golden cross.  However, with the RSI near the upper-bounds, there are increased signals that the current valuation is stretched despite the firm displaying a weaker P/E multiple than staunch competitor Wells Fargo.

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Based on the technical and fundamentals, it is not unreasonable to see further appreciation in JPMorgan shares, however, it could come at a substantial risk of a pullback and technical retrace. Stocks notoriously spend a large portion of their time trending horizontally or sideways. With this in mind, it is expected that a 30-60% pullback from the latest move puts share prices in the low $60s with present upside in the high $60s should shares break above 52-week highs as $66.18, probably targeting as high as $69 per share. In the meantime, investors looking for a bargain stock that shows strong top and bottom line growth would be keen to buy when prices dip below $63 per share, anticipating a rebound towards $66-67 per share.

Conclusion

JPMorgan is a strong example of how the US banking sector is on much surer footing when compared to the last financial crisis. Increased regulation coupled with larger capital buffers have been cumbersome for some banking institutions, however, JPMorgan has managed to outperform peers when looking at earnings basis even if its valuation multiple is slightly lower than competitors. Its strong leadership and equally strong outlook make it a strong value for longer-term investors and those seeking dividend income. However, at these levels, share prices are far more likely to trade sideways over the near-term, meaning that playing the range in the short-term is a better strategy for capitalizing on the languishing momentum higher. Prices will likely remain subdued until the next earnings release in approximately 2 months.